10 Things Your Auto Dealer Won't Tell You

In reality, a practice called "holdback" allows dealers to pay 1% to 3% below invoice for vehicles. The dealer buys the car from the manufacturer at the invoice price. Then after the car is sold, the manufacturer reimburses the dealer for the cost of keeping it in inventory for 90 days. When a dealer sells the car faster than that, part of the holdback payment becomes pure profit, even if the car is sold at invoice price. "You'll never get holdback money back from a dealer," says Burke Leon, owner of car-buying service BL Auto Enterprises and author of "The Insider's Guide to Buying a New or Used Car," but just knowing about it can help when a dealer whines that he can't meet your price.

2. "Our lenders aren't as tough as I make them seem."
Car dealers' reputations have been so bad for so long, some will do anything to pass the buck regarding pricing and sales tactics. One common trick? Blame everything on the lender. For example, some dealers who don't want to give you the price you're asking for will say that the leasing company requires all deals to be based on the sticker price, says Mark Eskeldson, a consumer advocate who runs the watchdog Web site CarInfo.com and wrote "What Car Dealers Don't Want You to Know." This probably isn't the case, since lenders can't control a car's price.

Likewise, some dealers will try to sell you an extended warranty, claiming the lender requires it. Don't be fooled, warns the Federal Trade Commission in its online FTC Facts for Consumers report on auto-service contracts, adding that you should contact the lender to check this out yourself. "I don't think you'll find many mainstream lenders that require that," says Art Spinella, vice president of CNW, an auto-industry market research firm.

3. "State lawmakers are in my back pocket."
Since auto dealers deliver huge sums in sales taxes to state coffers, they have powerful local and state lobbies and have succeeded in pushing through a lot of legislation to protect their interests. One of their biggest targets? Not surprisingly, direct sales over the Internet.

Most states' franchise laws make it illegal to sell cars in a particular state without a bricks-and-mortar dealership there, and the dealer lobby has been particularly effective at suppressing auto makers' attempts to sell over the Web. In 1998 Ford began a program in which car buyers could choose from used Fords online at no-haggle prices, then complete the purchase at a local dealership. A year later, Texas regulators filed a complaint against Ford for acting as a dealer without a franchisee's license. Ford sued, claiming that Texas law favors local dealerships, discriminating against interstate commerce. A district judge ruled against it.

4. "The bait-and-switch is alive and well."
You walk onto the car lot, your heart set on a certain model, but immediately the dealer starts ticking off all the reasons why that car simply isn't good enough for you. Before you know it, you've signed on for a car that's bigger and better and, of course, more expensive.

This old trick has a new twist, thanks to the Internet. These days car shoppers are showing up armed with all sorts of information they've gotten online, from the invoice price of the car right down to the cost of heated seats. The dealer's best defense is steering you into unfamiliar territory, says Phil Reed, a car-buying consultant at Edmunds.com.

That's exactly what happened to Christine Kemp, an Orange, Calif., junior high school teacher who got sucked into leasing a $40,690 Toyota 4Runner Limited last year, despite the fact that she'd been researching lower-priced models for over a year. At a California Toyota dealership that had advertised a 4Runner sale, the salesman immediately discouraged her from looking at the base model. "You don't want that car," Kemp says the dealer told her. "Its engine isn't powerful enough for towing" — a feature Kemp had said was important, since she was planning to buy Jet Skis. The dealer steered Kemp toward the Limited for a test-drive, talking up its perks. But in fact, even the four-cylinder base model is strong enough to tow Jet Skis, according to Toyota.

5. "I'll give you a great price — and then lowball your trade-in..."
If you're trading in an old car, explains Leon, the dealer's greatest potential for profit is in giving you a low value on your trade-in. How come? Most people have no idea what their car is worth, and besides, you're less likely to play hardball on this point when that new car is much more interesting. "They get you involved in loving the new car," says Leon. "And your old car seems kind of punk in comparison, so they 'do you a favor' and get it off your hands." For this reason, Leon recommends always settling on a trade-in price before even considering a new or used car, even though the conventional wisdom is to do it the other way around.

Last year, Reed went undercover as a salesman in two Los Angeles-area dealerships and then wrote about it for Edmunds.com. During those three months, he saw firsthand how much money can be made in used-car departments. One day, he says, he watched a man drive into the dealership's parking lot, scurry over to the used cars and then rush back to his car. "He said he had just traded in his Chevy Cavalier here a week ago," says Reed, "and wanted to know what they were selling it for." The answer? While the customer had gotten $5,000 for the car, its asking price on the lot was $12,000.